CSG Law Alert: United States Supreme Court Saves Taxpayer Millions in FBAR Penalty Case
On February 28, 2023, the United States Supreme Court delivered a major victory for taxpayers, limiting the penalty for non-willful failures to meet reporting requirements under the Bank Secrecy Act (“BSA”) to $10,000 on a per-report, rather than per-account, basis. Under the BSA, taxpayers with foreign accounts that hold an aggregate balance of more than $10,000 are required to file an annual Report of Foreign Bank and Financial Accounts, commonly known as an FBAR. The BSA imposes a penalty of $10,000 for non-willful violations but does not explicitly state whether these penalties apply per-report or per-account. Alexandru Bittner, a Romanian-born dual citizen, filed FBARs, but did not initially include over 272 foreign accounts over a five-year period in which he had “signatory authority or in which he had a qualifying interest.” Arguing that the BSA’s $10,000 penalty should be applied per account, the government imposed a staggering $2.72 million penalty. Bittner counter argued for a $50,000 maximum penalty, $10,000 per annual report.
The Court, in a sharply divided 5-4 majority opinion authored by Justice Gorsuch, agreed with Bittner, holding that the $10,000 penalty should apply on a per-report, not per-account, basis. It reached this conclusion by analyzing the BSA’s text, drafting history, and other features of its statutory scheme. Specifically, the Court found that the fact that Congress chose to specify that willful violations can be penalized on a per-account basis but did not so specify for non-willful violations was strong evidence that Congress did not intend for non-willful violations to be penalized on a per-account basis. Responding to the dissent, the majority was also not persuaded that the failure to penalize non-willful violations on a per-account basis would cut against the BSA’s objective to identify criminal and terrorist activity, querying, “Are we to imagine that drug cartels and terrorists often make innocent mistakes when filing their FBARs?”
As further evidence weighing against the government’s argument, the Court identified several examples of government-issued guidance that stated that a failure to file an FBAR came with a maximum penalty of $10,000. Finally, the Court invoked the “rule of lenity,” a principle that requires courts to strictly construe penalty statutes in favor of taxpayers, succinctly concluding that, “In these circumstances, the rule of lenity, not to mention a dose of common sense, favors a strict construction [against the government].”
The Court’s holding in Bittner grants welcome relief to taxpayers subject to FBAR filing requirements. A burdensome reporting scheme, coupled with a notable up-tick in U.S. citizens moving overseas, has created plenty of opportunities for taxpayers to commit non-willful violations. It will be interesting to see if Bittner emboldens future challenges to draconian penalties imposed by government, brought by taxpayers similarly seeking leniency and a dose of common sense.